HP Inc. (NYSE:HPQ) shares are up more than 6.14% this year and recently increased 0.31% or $0.07 to settle at $22.30. U.S. Bancorp (NYSE:USB), on the other hand, is down -4.54% year to date as of 05/17/2018. It currently trades at $51.15 and has returned -0.04% during the past week.
HP Inc. (NYSE:HPQ) and U.S. Bancorp (NYSE:USB) are the two most active stocks in the Diversified Computer Systems industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect HPQ to grow earnings at a 9.08% annual rate over the next 5 years. Comparatively, USB is expected to grow at a 7.67% annual rate. All else equal, HPQ’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 49.5% for U.S. Bancorp (USB). HPQ’s ROI is 62.80% while USB has a ROI of 11.40%. The interpretation is that HPQ’s business generates a higher return on investment than USB’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HPQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, USB’s free cash flow per share was -. On a percent-of-sales basis, HPQ’s free cash flow was 1.2% while USB converted 0% of its revenues into cash flow. This means that, for a given level of sales, HPQ is able to generate more free cash flow for investors.Valuation
HPQ trades at a forward P/E of 10.69, and a P/S of 0.68, compared to a forward P/E of 11.73, a P/B of 1.93, and a P/S of 5.72 for USB. HPQ is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HPQ is currently priced at a -13.43% to its one-year price target of 25.76. Comparatively, USB is -12.65% relative to its price target of 58.56. This suggests that HPQ is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. HPQ has a beta of 1.64 and USB’s beta is 0.95. USB’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HPQ has a short ratio of 2.56 compared to a short interest of 1.97 for USB. This implies that the market is currently less bearish on the outlook for USB.Summary
HP Inc. (NYSE:HPQ) beats U.S. Bancorp (NYSE:USB) on a total of 11 of the 14 factors compared between the two stocks. HPQ is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HPQ is the cheaper of the two stocks on an earnings, book value and sales basis, HPQ is more undervalued relative to its price target. Finally, FB has better sentiment signals based on short interest.